A more thorough explanation:

Section 1244 stock is a type of stock transaction that allows shareholders of a small business corporation to treat up to $50,000 of losses (or $100,000 for a married couple filing jointly) from the sale of stock as ordinary losses instead of capital losses. This means that if the stock decreases significantly in value resulting in a loss, the owners of that stock may be able to deduct that loss as an ordinary loss.

A small business corporation is defined as a corporation that has received no more than $1,000,000 in money and other property for stock. This provision is found in the Internal Revenue Code at 26 U.S.C. § 1244.

Normally, when someone sells stock, it is treated as either a short-term or long-term capital gain or loss. However, Section 1244 allows shareholders of a small business corporation who sold stock at a loss to avoid the limitations on deductions and deduct the entire loss from their sale as an ordinary loss immediately in the year of realization.

John owns stock in a small business corporation that he bought for $10,000. A few years later, he sells the stock for $2,000, resulting in a loss of $8,000. Normally, this would be considered a capital loss and John would only be able to deduct $3,000 of the loss from his taxes. However, because the stock is Section 1244 stock, John can deduct the entire $8,000 loss as an ordinary loss on his taxes.

Another example would be if a married couple owns Section 1244 stock in a small business corporation that they bought for $20,000. They sell the stock for $5,000, resulting in a loss of $15,000. Because they are filing jointly, they can deduct the entire $15,000 loss as an ordinary loss on their taxes.

These examples illustrate how Section 1244 stock allows shareholders of a small business corporation to deduct losses from the sale of stock as ordinary losses instead of capital losses, which can result in a larger tax deduction.